Construction projects (and contractors) end up in Ohio’s courts far too often, and the question on every owner or contractor’s mind is, “can we recover our attorney fees?” Ohio’s Seventh District Court of Appeals recently answered this eternal question and reaffirmed Ohio’s use of the “American Rule” for recovering attorney fees, which means attorney fees can be recovered … sometimes.
The case, Zerger v. Schafer, 2020-Ohio-4817, involved a deck builder who contracted with a homeowner. After the homeowner refused to pay for materials pursuant to the contract, the deck builder sued. The homeowner did not answer the complaint, and eventually the court granted a default judgment for the materials as well as attorney fees, totaling $1,500. On appeal, the Seventh District affirmed the default judgment as it related to the materials, but vacated the award of attorney fees, citing Ohio’s adherence to the American Rule.
Under the American Rule, the prevailing party in a lawsuit may only be awarded its attorney fees in one of three scenarios, by statute, by contract, or when the other side acts in bad faith.
Attorney Fees by Statute
Attorney fees may be awarded when the statute in question authorizes the payment of fees by the losing party. Some statutes common to the construction industry that include fee-shifting language include the Prompt Payment Act, the Home Construction Service Suppliers Act, and the Mechanic’s Lien Law.
A breach of contract dispute due to non-payment on a construction project generally does not fit within these statutes, unless the payment was late or a mechanic’s lien was filed. Additionally, even though these statutes do grant courts the authority to award attorney fees, almost all fee-shifting provisions include a section that allows the court discretion in deciding if, and how much, fees to award the prevailing party.
Attorney Fees by Contract
Ohio allows fee shifting by contract as part of the “fundamental” right to contract. Fee shifting provisions in contracts are generally upheld by Ohio courts, with four exceptions: (1) when the parties have unequal bargaining power, i.e. Spectrum is your only cable provider; (2) the attorney fee provision is not negotiable; (3) the fee provision promotes litigation or illegal acts; or (4) the provision acts as a penalty.
Attorney Fees by Bad Faith
Attorney fees may be granted by courts when one party acts in bad faith. The Ohio Supreme Court has described acting in bad faith as acting vexatiously, wantonly, obdurately or for oppressive reasons.
Another situation courts award attorney fees for bad faith is when one party breaches a settlement agreement. In this situation, the fees expended by the non-breaching party are deemed compensable by Ohio courts because, in essence, the breaching party acted in bad faith. Since the settlement agreement was freely negotiated once before, a breach is a renegotiation, or bad faith.
Fee Shifting Provisions Should be Fair
The single best way construction contractors can ensure it receives its attorney fees after winning (or prevailing on) a dispute is to include a fee-shifting provision in the contract. However, any fee shifting provision should be clear and fair in. If the contract contains a fee shifting provision, the provision should benefit the prevailing party, rather than be one-sided.
Contractors too often rush or overlook the contracting process. Instead of rushing through, contractors should devote more time and energy to the initial contracting process, including contracts with upper-tier parties and contracts with lower-tier contractors. More time spent crafting and understanding project contracts at the outset can eliminate potential problems as the project progresses. Our construction team can help you form and review contracts to help you deal with and mitigate risks on projects, which will ultimately increase your company’s chances of success.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.